Blockchain in post-trade: Blocked by regulations and legal challenges

Abstract

This paper analyses the reluctance towards the implementation of blockchain in financial markets and post-trade. It discusses possible barriers to replacing current post-trade systems with blockchain and distributed ledger technology (DLT). It focuses on the regulatory challenges facing post-trade operations. Blockchain and DLT have created considerable disruption to financial markets. Although the technologies increase efficiency, reduce costs and increase security, blockchain and DLT raise many challenges that work against current processes and regulations. It has been identified that post-trade functions potentially benefit from the implementation of new technologies such as blockchain and DLT. Many markets have launched different types of initiatives and pilots to test the application of blockchain or DLT. Many real final products on blockchain and DLT are, however, still in pilot stages. Of the various challenges impeding successful implementation, the highest identified obstacle relates to regulatory challenges. Regulatory challenges facing post-trade functions can sound the death knell as post-trade functions are highly regulated and very critical to the securities market. Legal concerns about the implementation of blockchain and DLT vary between the need for solutions and the need for upgrades in regulations. Some points require further investigations and analysis to solve such legal concerns. On the other hand, some points require the current regimes to upgrade and incorporate the new structure that blockchain and DLT follow. The new regulations need to create adequate governance on the new database and workflow to define processes and definitions that build trust in the new system and protect investors and data. All regulators need to investigate the need to update current regulations and introduce new regimes to govern the use of blockchain and DLT in current trades and trade processes.